Under the MiFID II Directive EU ETS operators are classified by investment firms and trading venues for reporting purposes as category of traders different from financial institutions and other commercial undertakings.

MiFID II exempts in Article 2(1)(e) the EU ETS operators from requirements of this Directive, which means that they are not subject to the financial regulation involved.

EU ETS operators are categorised by MiFID II under the label: "operators with compliance obligations under Directive 2003/87/EC".

This exemption is entirely new to MiFID and is involved with the legislative novelty of classifying emission allowances as financial instruments (for details see here).

The use of the said exemption is, however, contained with important restrictions which must be observed on the continuous basis (cf. Recital 36 to MiFID II).

MiFID II requires that EU ETS operators when dealing in emission allowances under this exemption, mustn't execute client orders neither provide any investment services or perform any investment activities other than dealing on own account.

Moreover, EU ETS operators in order to remain within the scope of this exemption are also not allowed to apply a high frequency algorithmic trading technique.

This exemption covers emission allowances in themselves (spot market), which are classified by MiFID II as financial instruments, however, its application to emission derivatives founds no legal basis on the ground of wording of the provision at issue.

As opposite to some other exemptions, which explicitly refer to "emission allowances or derivatives thereof" the EU ETS operators exemption applies "when dealing in emission allowances" only and does not include any reference to emission derivatives products.

Thus, the use of this exemption is clearly restricted to emissions spot market.

The EU ETS operators active on both emissions markets: spot and emissions derivatives, under MiFID II will inevitably have to make use of the two distinct MiFID II exemptions to remain outside the scope of financial market strict regulatory regime. After all, MiFID II recitals explicitly state that "exemptions apply cumulatively".

Another potential problem under MiFID II may be encountered by installations' operators, who sometimes used to sell their allowances (for instance for financing purposes) with the intention of the later buy-back. However, considering the revamped EUAs' status under the MiFID II regulatory regime, such a practice may involve a risk for installations' operators of being recognised by financial authorities as a carbon professional traders (which entails the MiFID licence requirement).

The solution may occur, as with the previous case, to use the ancillary activity exemption, however, the term "ancillary" will require particular attention (there is a need for verification whether MiFID II level 2 legislation will allow for such an approach).

It appears relatively certain that EU ETS operators will not be able under the MIFID II regulatory regime to engage in the speculative activity in emissions market, since such trading aimed at profit-making (and not captured as hedging) is not included in any available exemption.

Requirements not covered by the exemption

Even if the EU ETS operator trades within the scope of Article 2(1)(j) exemption only, the compliance with the MiFID II reporting obligations is necessary.

Article 17(1) to (6) of MiFID II on algorithmic trading applies to members or participants of regulated markets and MTFs.